Will BP plc continue to outperform Royal Dutch Shell plc?


The fortunes of BP(LSE: BP) and Royal Dutch Shell(LSE: RDSB) have varied considerably over the past five years. BP has been struggling to deal with the fallout of one of the greatest man-made environmental disasters of all time, the Deepwater Horizon incident. Shell, on the other hand, has had a relatively uneventful few years. 

However, when it comes to share price performance, BP has outperformed its larger peer significantly since 2011 despite the company's problems. Since the end of 2011 shares in BP have outperformed those of Shell by just under 16% excluding dividends. 

It seems the bulk of this outperformance can be traced back to Shell's acquisition of BG Group. When the deal was announced, Shell's shares took a beating as investors widely believed the company was making a huge mistake by paying a premium price for BG as oil prices fell. 

And as Shell has been expanding, BP has been shrinking. Since the 2010 Gulf of Mexico disaster, the company has been selling off non-core assets to pay the resulting fines. These asset sales have helped BP high-grade its portfolio, low returns assets have been sold while the most lucrative assets have been retained by the company. What's more, the bulk of these sales were completed before the oil industry downturn began, so the company should have been able to get the best price for the assets. 

BG a bad deal? 

On 15 February, the entire issued and to-be-issued share capital of BG was acquired by Shell and eight months on, the deal isn't proving to be the disaster some were claiming it would be. Oil prices are coming back from their lows, and the enlarged Shell is well positioned to capitalise on the world's ever increasing demand for hydrocarbon fuels. 

As a result, it would appear the market is starting to trust Shell once again. Year-to-date shares in Shell have actually outperformed shares in BP by 5% excluding dividends, making up for some of the underperformance of the past few years. 

As long as oil prices continue to recover, this trend looks set to continue. The success of Shell's acquisition was always dependent on the price of oil. Now oil prices are rising the deal makes a lot more sense for both Shell and its investors, and it seems the market is finally starting to realise the significance of the deal. 

If oil prices continue to rise, Shell may bring BP's run of outperformance to an end. Shell is the bigger company with a larger global presence. Just like BP, the group is now looking to sell-off non-core assets, improve margins and pay down debt. At the same time, earnings will receive a boost from the acquired BG production and trading assets. 

Which looks the best bet? 

Overall, it's unlikely BP will continue to outperform Shell. As the benefits of the BG merger flow through, investors will return to Shell to take advantage of the company's dividend yield and global dominance. Shares in Shell currently support a dividend yield of 7.1% and shares in BP yield 6.3%.

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Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended BP and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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